Q2 2020 Dine Brands Global Inc Earnings Call
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Hello, and welcome to the second quarter tiny tiny Bang, Brad <unk> earnings Conference call. My name is that he and I will be your conference operator.
At this time, all participants are aggressive owning or if you have any questions. Please press star then one.
So in telephone.
Please note that this conference is being recorded I.
I would now I'll turn the call over to Mr. can be <unk> executive director of Investor Relations. Sir you may begin.
Good morning, welcome to Dine brands second quarter Conference call I'm joined by Steve Joyce CEO, Tom song CFO Jay.
Abide.
John Chiminski President of Applebee's.
<unk> Colbert to Steve from Tomorrow.
Please remember a safe harbor regarding forward looking information during the call mantra made its Scott.
Forward looking involve known and unknown risks.
Uncertainties and other factors, which may cause actual results to be different modes right reply.
Sleep evaluate the forward looking information in the context that these factors, which are detailed in today's press release and 10-Q filed.
The forward looking statements are as of today and assumes no obligation to update first muskie statement.
We also refer to certain non-GAAP financial measures, which are described in our principally and also available on time brands, especially on its website with that I'll turn the call over to Steve.
Thank you Ken good morning, everyone and thank you for joining us [laughter] before we get started I know the last few months have been challenging for everyone. So I hope, you're all safe and doing well.
So like you recognize our franchisees and team members for their continued hard work during these difficult times, which has brought out the best in our team across both our organization and system.
Some creating resource for ways to drive our business. During these times to having these solid focus on our guests and walking them back into our restaurants.
Our approach has generated some good progress with that let's turn to the second quarter results. When we last spoke to you. We provided they look into the sequential improvement in weekly comp sales trends for April notably after reaching lows in late March sales trajectory for both brands continued to improve.
Through June as dining restrictions reais and stage began to gradually reopened.
[noise] guests, who felt more comfortable about restaurant dining we're eager to get out after a long period of staying at home whether that Mr off premise outdoor for indoor dining.
We set out to bolster this variety of options to meet the different needs of our guests and establish stringent safety protocols that one is still confidence and keep guests coming back.
Despite the impact of Cobiz 19, our brands showed meaningful progress in recovery, which we believe reflects the successful execution of our on premise business and the affinity guests have four brands, while our restaurants have always offered guess respite in a place to enjoy being with friends and.
Family, they've continued to save a great food increasingly in the comfort of their own homes as the strong growth of our off premise business demonstrates.
We remain optimistic about the overall marked improvement in industry sales and traffic data since April which would support continued momentum in our business.
We're closely monitoring those states that have recently reversed the reopening plans. The situation is obviously fluid at both the state and local levels. So we'll be premature to attempt to quantify any impact presently however, we're staying nimble in the San Fran changing environment and shifting our approach is when warranted such.
As refocusing on outdoor dining and off premise service, where it makes sense.
We've demonstrated the ability to manage our business during a challenging second quarter and our franchisees prove their tremendous resiliency in meeting the convenience and safety needs of our guess, we've also leveraged our digital capabilities to pool to support significant growth in our on premise business.
To provide some details applebee's online just go sales from the second quarter increased sequentially by approximately 18 percentage points to 23% of total sales was off premise sales representing 61% of total sales. Similarly, IOP experienced growth of 28 percentage.
Points in online to go sales just 35% of total sales during the same period was off premise sales representing 54% of total sales.
The off premise business at both brands continued to post significant growth in the second quarter as guess became more familiar with the platform.
We believe our sales will be further supported as dining room restrictions or lower.
John and Jay will provide additional details on their respective brands later.
During the reopening process Dines crisis management team remains fully engaged with local state and federal authorities to obtain the latest information available, enabling us and our franchisees to make well informed decisions.
[laughter].
I'm pleased to say that at the end of the second quarter, 95% of our domestic restaurants are open for either dine in or off premise service. This compares to 82% at the end of the first quarter, which primarily consisted of takeout and delivery service.
As we reopened dining rooms in accordance with government mandates the health and safety for our guests franchisees and team members. Our top priorities. In addition to following guidelines provided by the CDC as well as state and local governments, we've implemented our own operating procedures at both Applebee's and IHOP these into.
But are not limited to.
Say food handling procedures. In addition to practices to ensure that the restaurants are sanitized, including team members, who focus on cleaning and sanitizing common touch points throughout the restaurant.
As we continue to welcome guess back we want to ensure that they feel safe and comfortable whether they choose to dine in restaurants are off premise.
Our research has shown that consumers have a strong desire to return to restaurants in fact out of the top five categories. The consumer said brought them. The most joint dining out was ranked the highest.
As we enter a new normal for died and we know the gas will view health and safety as equal to value in Craveability and we'll continue to serve our guest needs and desires.
Our cross functional teams have worked relentlessly to ensure our franchisees are equipped with the right information to make sound decisions for their operations and their teams.
We're working closely with our franchisees and taking the necessary steps to prepare our restaurants. So that we can emerge from this pandemic in a strong competitive position.
The Corona virus has had a profound impact on businesses across the country and the globe as you know the restaurant industry has been especially hard hit as a result industry analysts estimate that a substantial number of independent restaurants that have closed due to covert 19.
We will not survive.
In contrast started brands has the advantage of scale a strong cash position in liquidity experienced restaurant operators and an asset light business model collectively this profile has enabled us to withstand the challenges facing our industry, which makes me more optimistic about our future.
Looking ahead, we believed that there are potential opportunities to increase our market share.
Due to expected closure of independent restaurants will continue to assess the competitive landscape as we focus on our near term priority, which is returning our core business to sustainable growth with that I'll now turn the call to Tom to provide an overview of the first quarter results Tom.
Thank you Steve Good morning, everyone I hope that you and your families are all doing well.
Given the circumstances I'm going to first review the financial initiatives and decision diners taken during the nine done then I'll discuss our financial results for the quarter.
First we responded by fortifying our financial position during this challenging period for industry. As a reminder, we borrowed a total of $220 million from a revolving credit facility in March as of June thirtyth entire amount remains strong.
The send the second quarter, we continued a strong liquidity position in significant cash on our balance sheet totaling 342, and a half million dollars of which 278 and have millions is unrestricted.
I'd like to highlight that non current restricted cash increased by $16.4 million due to dine voluntarily doubling its interest reserve to enhance our securitization structure. In addition to further support our securitization we voluntarily accelerate the funded a quarterly interest and as a.
Today for example, we have already fully funded interest payments due on September.
We did not repurchase or common stock during the quarter anticipate this will continue for the foreseeable future.
Turning towards unit, we made some very difficult decisions to furlough approximately one third of our corporate staff, which led to the sharp decrease in GNS for the second quarter 20, $20 million to $30.9 million as compared to $39.4 million for the second quarter 2019. This represent.
It's a 22% decline.
The decrease was mainly due to lower compensation expenses as well as reductions in other discretionary costs.
I wanted to clarify that during this quarter of extreme austerity, we're able to reduce our gross cash DNA to approximately $27 million, which includes capital expenditures. However, we're not changing a 30 million dollar per quarter figure that we previously mentioned for DNA.
Capital expenditures for the remainder of the here as we have recall some of our team members from furlough and anticipate resourcing or business to serve our franchisees.
To provide financial support for franchisees would disclose last quarter, we implemented franchising assistant measures aimed at enhancing the stability of both brands.
The assistance, primarily consisted a deferrals or royalty and advertising payments, primarily for March and April for both brands and for certain IHOP franchisees also rent payments.
Additionally, we allow our house franchisees the further remodel a new unit development obligations for 2020.
Most franchisees did availed themselves or support.
Aggregate, we provided nearly $56 million a deferral for franchisees offsetting these significant deferrals, we received approximately $11 million or deferrals statements from or landlords on our hot property listener subleased to our franchisees as well as our other these properties.
While the programs offered both through time and the cares that help to somewhat mitigate the financial impact the covenants in our franchisees the effective dining room closures in restrictions has caused significant deterioration in franchisee cash flows.
As a result, we recognized over $5 million a bad debt expense during the second quarter.
I would like to note that after the deferral period, both applebee's and I have franchisee collections have been strong at each brand AD fund is in the stable position at this point.
Also as previously disclosed in IHOP franchisees that operated 49 locations initiated an assignment for the benefit of creditors and then subsequently filed for bankruptcy.
In July 14, one of the 49 units were sold to a new franchisee approved by US as part of this transaction, we received $4.6 million, which represents a complete recovery and fees.
Let's switch gears towards second quarter financial results for the second quarter at Twentytwenty, We reported an adjusted net loss per diluted share of 87 cents compared to adjusted EPS of $1.71 for the seven same quarter 2019, while we.
We started the quarter at a very low point with weekly comps down 77% at Applebee's and down 82% die out for the weekend that April 5th both brands improved dramatically with applebee's down, 18% and I hopped down 34% for the last week for the quarter.
This represents improvements of 59 percentage points of 47 percentage points for Applebee's and IHOP, respectively.
You'll also see in our reported results that we recorded over $140 million of impairment losses for the quarter, most of which was attributable to applebee's goodwill and intangibles.
Turning to our securitization our leverage ratio as of June Thirtyth was 6.3 times up from 4.8 times as of March 31.
Under our securitization structure, we're required to make quarterly principal payments of three to quarter million dollars, what our leverage ratio is greater than or equal to five in the quarter times, which is our total debt at quarter end divided by adjusted EBITDA for the pre for preceding quarters.
Please note that exceeding the leverage ratio apply an importer times is not violate any covenants related to the securitization, we anticipate making in principle payment in the fourth quarter 20 points.
I would like to highlight that are debt service coverage ratio or D. SCR remains robust at 3.34 times.
As of June 3rd the first key DSC, our measurement is trends when a ratio was below one and three quarters times. So we have ample cushion.
Adjusted EBITDA for the second quarter at Twentytwenty was $12.1 million compared to $68 million in last year's second quarter.
Turning to our tax rate, our GAAP effective tax rate for the second quarter 2020 was 8.2% tax benefit compared to 26.4% expense for the second quarter of last year. The primary reason for the variance was due to the nondeductibility of impairment of at least goodwill and the mountain.
$92 billion.
I'll wrap up on a positive no our international business is off to a promising start in the third quarter. We recently opened.
For new restaurants. These include two Iops in Canada, one Applebee's and Mexico City is what Applebee's and Puerto Rico. We also recently entered into with 13 unit development agreement for Iops, India was a very experienced multi unit QSR developer. This is a key market for us and complements our prior development agreement for Applebee's.
In India, which we executed in late 2019.
I would also like to welcome Tony Orlando, President of our International Division and Justin Skelton, our new CIO onto Dimes executives.
To close well or industry remains challenged we've taken steps to ensure we continue to rooms maintain strong liquidity and remain responsive to franchisees are brands of significant scale as Steve mentioned and are well positioned to benefit from any potential contraction in restaurant industry.
Competition.
We've experienced meaningful improvement in our off premise business at both brands, which will greatly complement our diamond sales when restrictions on restaurant operations are further lifted.
With that I'll now turn the call over to John.
Thanks, Tom and good morning, good afternoon, everyone I've been looking forward to sharing these results given all that's unfolded. The since we last spoke about 90 days ago I plan to provide detail on Q2 as well as a review of what's transpired here in the month of July let's start with a bit of context pre coated the apple.
These brands had tremendous momentum we posted a 3.2% comp sales increase through March eight meaningfully outperforming the casual dining category and delivering 10 consecutive weeks the positive sales to start the year.
Once the pandemic emerged in March we temporarily closed about 250 restaurants in quickly move to an off premise business model.
As a result April comp sales declined 70.4% may sales declined 54.1% as we began to reopen our dining rooms in June sales were down 29.3% as we began to see a real shift in momentum.
Four primary factors impacted our Q2 results. The most obvious was the closing of dining rooms, which represented approximately 85% of our business pre coated once dining rooms began to reopen government imposed capacity constraints represented another meaningful variable with most geography.
Isn't posting a 25% to 50% capacity restriction another factor limiting our revenue recovery is the understandably cautious nature of the American consumer in this environment, which of course varies depending upon the geography and finally, we chose to discontinue all national marketing.
Back on March 18, and we've been on a self imposed media hiatus through almost all of the Q2 in hindsight. This was absolutely the right strategy as we allowed our AD fund to replenish while waiting for the right time to reintroduce Applebee's to America.
Now, let's talk about where we are today I'm very pleased to announce that 1600 Applebee's restaurants are currently open for business in the us representing 97% of our portfolio.
The remaining 56 restaurants, or a combination of temporary and permanent closures that will evolve slightly as we progress through the balance of the year.
The 1600 open restaurants about 1400, 50 or fully operational with open dining rooms, and given the recent dining room shutdowns in New Jersey, New York, California, New Mexico, South Florida in Philly.
Today most of them. We now have about 150 restaurants operating in an off premise only mode with some outdoor dining.
And we certainly expect these numbers to evolve as local governments modify their guidelines in this very fluid environment.
I want to take a moment to talk about our franchise partners. The restaurant teams in our cross functional leadership team.
Throughout this pandemic our top priority has always been the safety of our team members and guests in our partners have simply been exceptional in delivering upon our elevated brand standards.
However, there was no playbook for this back in March the pandemic took us all by surprise. This adversity has unlocked a from my perspective, a remarkable entrepreneurial spirit of creativity agility and resilience virtually everything we do in this environment is new and different and in many cases better than it was.
Four months ago, good I couldn't be more proud to be associated with this talented team then I am today I've often stated that applebee's is at its best in tough times and that certainly proving to be the case once again.
And the good news is we're now beginning to see genuine momentum returned to the business. Thanks to our franchise partners and our Chief operations Officer, Kevin Carol our restaurants were prepared and ready with respect to safety sanitation parking lot staging social distancing contact free dining out.
Door dining as well as well as all of our food and beverage standards.
After an approximate 90 day media hiatus, we return to national marketing in mid June with a terrific digital media plan crafted by our Chief Marketing Officer, Joel you Shinsky.
Plan was broadened in early July to welcome guess back to our dining rooms, while continuing our off premise messaging.
In particular, we received positive feedback around the tonality and authenticity of our current advertising. So the music from welcome back Cotter for those of you.
Called enough to remember that show.
I hope you've had a chance to see that add because it's the perfect message for applebee's as though the lyrics were written specifically for US at this precise point in time and it appears to have really resonated with our guests. In addition.
For the current product were featuring Applebee's irresistible is a great example of a bundled value in broadly appealing innovation developed by our Chief Colin Every officer, Stephen Boulder Rally.
And this also illustrates importantly, the power of our supply chain team and their ability to move fast and supply the brand with very little notice as was certainly the case here.
Our restaurant PNM sales have also benefited in this environment from a substantial reduction in our core menu, resulting in the simplification of our operation better execution.
And a reduction in food and labor costs of course, some of this benefit is offset by a heavier reliance upon off premise and its packaging costs as well as our investments related to safety and sanitation.
So, let's talk about our business momentum and provide the complete picture as to where we stand today.
After studying sequential progress throughout Q2, we saw noteworthy change in our comp sales trajectory from minus 37% in early June to an average of minus 18% over the past six weeks, while posting a minus 15.6% result, this past week ending July 26.
Representing our best comp sales performance since the crisis began.
Additionally, and importantly, according to the most recent four weeks a black box reporting Applebee's is once again outperforming the casual dining category.
President of our 1400 50 restaurants with open dining rooms average weekly sales are about $39000 with 64% of this volume being dine in and 30 section 36% off premise now of this off premise volume approximately 68.
Percent is applebee's car side to go and 32% would be delivery from my perspective. This convenience oriented and digitally led business is really thrived under the leadership of Scott Gladstone.
In for obvious reasons is more important to us and our guests than ever before.
We remain very well positioned in this off premise segment and execution has really become core competency of the applebee's brand.
Interestingly as we reopened dining rooms, we appear to be holding most of our off premise business with only about 15% to 20% cannibalization rate, suggesting the relevance and staying power with applebee's to go and delivery.
On another positive note after the deferral of March April royalty and advertising payments I'd like to highlight that Applebee's AD fund is now in a cash flow positive position as we're also beginning to restore royalty income stream.
While we navigate the uncertainties in this environment, we remain 100% aligned with our franchise partners to return our business to its full revenue potential as quickly as market conditions allow.
In closing I believe Americans will choose brands They trust in this environment.
And we've been working hard to nurture that longstanding trust and applebee's over the past several months looking forward I am confident applebee's as well position to continue its trajectory, particularly given our momentum in the likely contraction of CDR restaurant supply overtime.
With that I'll turn it to Jay.
Thank you John Good morning, everyone Hope you are all doing well.
I also performance continued to be impacted by the effects of governmental mandated restrictions on restaurant operations due to covet 19.
This was consistent with the overall family dining category according to industry data.
For the second quarter Iops comp sales declined 59.1% as traffic remained challenged primarily due to dine in restrictions statewide stay at home orders continued high unemployment and temporary restaurant closures. However, I'd like to highlight that our weekly comp sales for the second quarter improved.
Since the weekend the April 5th in fact, the brand posted 12 consecutive weeks of sequential sales improvement in the second quarter. Additionally, Tom traffic improved sequentially every week during the quarter estates began to gradually allowed dining rooms to reopen with capacity restrictions.
Which were generally around 50%.
As we entered the third quarter performance in July reflected the resurgence in front of ours cases, and dining room restrictions put in place by state and local governments due to spike. Additionally, we did not utilize national media through the first three weeks in July.
As a reminder, we discontinued our marketing late in the first quarter, except for some basic local marketing and a brief off premise campaign.
Regarding Daypart performance every day parts sales and traffic improved sequentially month to month in the second quarter, while the overall sales improvement from April to June was fairly even across all Dayparts breakfast was approximately 200 basis points behind lunch and dinner respectively.
Mainly due to say hey, white mandates to remain at home and rising unemployment there were essentially less people stopping for breakfast on their way to work.
Additionally, the breakfast category in general has faced some pressure compared to other meal periods. According to NPD group breakfast or the morning snack occasion has experienced the steepest transaction declines.
However, with more people generally staying at home I'm pleased to report continued strong growth in our off premise business, even as dining room started reopened.
Our press comp sales for the second quarter increased by 145% primarily driven by traffic.
Delivery sales accounted for 23.4% of sales mix and takeout accounted for 33.5% of sales mix for the second quarter.
We're successfully leveraging technology to support our to go business, while meeting the convenience needs of our gas.
The second quarter digital sales grew by approximately 28 percentage points to 35% of total sales.
Another facet of our off premise platform experiencing mean from profits curbside pickup which was launched during the week ending March 29.
The service doubled to 6.3% as a percentage of total off premise sales for the weekend in April 5th compared to the prior we I'm pleased to say, we seen progressive growth increasing to 8% of off premise sales for the week ending June 28.
We believe our collective offerings initiatives will continue to drive sustainable growth as more people are utilizing go now than before the pending as a result, a wider range of gas are familiar with the ease and convenience of having a favorite IHOP meals to pick up or be delivered.
Now, let's switch gears, so the status of reopening our domestic dining rooms, we started reopening on April 21st as of June Thirtyth, approximately 92% of our domestic system was opened for business.
Of which 88% was open for in restaurant dining and 4% for takeout and delivery only.
Approximately 8% were temporarily close.
As of July 27, 1500, 65, domestic restaurants, or 92%, we're open for dynamic or off premise.
Undoubtedly providers is having a profound impact on our industry as a result, a significant number of independent restaurants are not expected to survive as Steve mentioned earlier. This scenario actually provides an opportunity for IHOP to increase its market share as some independence close their doors permanently and I hop continues to grow through traditional.
Non traditional development.
On a growth this year has been adversely affected by Coven 19, our franchisees opened 13 restaurants in the first half of the year, reflecting their continued confidence in the brand and our long term strategy.
Looking ahead, our near term priorities are to quickly and most importantly safely restore sales and traffic the last years levels.
This can be achieved by first focusing on safety of our guests and team members to write a comfortable environment in our restaurants.
Secondly continue to grow our off premise business and third to provide compelling value propositions to entice guest to come back into our restaurants.
While consumer still has some concerns about dining out there was a strong desire to return to restaurants based on our proprietary consumer research.
Now to tie this altogether, we have plans to return some marketing broadly and emphasize iops appeal across all dayparts, while also focusing on driving off premise sales. In fact, we recently started national advertising again on the 22nd of this month.
To wrap up our goal is to return to a sense of normalcy in a way that meets comfort needs of our guest.
We've made some good progress in the second quarter to improve our sales and traffic, but theres more work to be done obviously.
I believe I have is well positioned to withstand current industry headwinds and demonstrate why the brand has been ranked the leader and family dining based on domestic restaurant sales for over 10 consecutive years. According to Nations restaurant News I'm very optimistic about the road ahead as state and local government restrictions on restaurant operations are below.
Howard with that I'll turn the call back over to Steve for closing comments, Thanks, Jay to recap, both applebee's and IHOP posted steady improvement in weekly comp sales and traffic during the quarter.
Our off premise business continued to deliver substantial growth as guest became more familiar with the to go service. We ended the quarter with a strong cash position and ample liquidity.
Lastly, we are well positioned to withstand current industry headwinds and stand to benefit from the potential opportunities to expand our market share.
Now we'll be pleased to open up the called any questions you may have operator.
Ladies and gentlemen.
Mr. Wang please press by given the number one and with that.
Thanks.
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Hi, this questions and thank you you.
From Mr. Jake Bartlett from Suntrust. Your line is open.
Great. Thanks for taking the questions.
My first one is about I just wanted to make sure I understand Stuart stand how many stores are offering dining currently.
After California were shut that down I think from the numbers, you've given where the end of June so maybe just to clarify that and then also in terms of applebee's.
Glad to hear the the detail on average weekly sales.
Stores with offering Guy and I think was 39000, how does that compare to the similar period last year I'm, just trying to get a gauge how those stores.
Really are comping versus stores with with only off premise.
Let's start with open restaurants on Jonas.
Yes.
The JK. This is John 1400, 50, plus restaurants have dining rooms open at Applebees net numbers fluid is literally fluctuates on a daily weekly basis, California being the most recent.
Where we lost I think 90, plus restaurants in terms of shutting down dining rooms, and I'll come back on the other question after Jay speaks to.
Yes on the IHOP side, we've got to basically 78% of our restaurants are often without restrictions with 1300 20, plus restaurants. We've got 244 restaurants now that are back to doing on premise on its mainly driven by the California change that's 14% of our system was off premise and like I said.
Stood at about 8% that are closed at the moment I guess for us in California.
We have a larger footprint I think that applebee's does out there and clearly has an impact on us.
We've been doing on average about 35% of our business in and to go across the nation.
So that takes up in California, obviously, when the dine in goes down but in looking at our numbers I mean, just as a comparison when when we have a location that if you look at all of our restaurants that are open for dine in they're running a little less than 30% down in sales. If you look at restaurants, where.
There are only doing on premise those restaurants average down about 57%.
Clearly makes a difference over 20% difference if you don't have Diane.
And then Jake your final question the 39000 dollar.
Weekly volume per restaurant that I referenced as recent as recent as last week that would be to your question about a 15% drop from year ago average weekly restaurant volumes last year keep in mind for brand. It's 2.4 2.5 million dollar annual volume.
Would be about 46000 weekly so we're getting close and we're seeing sequential improvement each month I.
I think it's also important to note that those numbers are highly variable depending on market.
So we've got some folks that are pretty close to where they work on occasion ahead, we've got some folks, particularly in California that are obviously given the restrictions are struggling so it's up.
Those are averages and it's very quite significantly across the board, yes, I think as Jay mentioned important point you could look at the state like California, where you have a comp sales number of 50 minus 50%.
And you can add some other geographies that are positive comp sales and we have we certainly have that right now of late.
Great and you wouldn't be it would you be able to share on the applebee's side much like.
Just shared on on the upside to the percentage down for dine in versus off premise, we can kind of roughly do the math, but if you could if you can help us out that that'd be great.
The percentage down it looks the delta between.
I'll just frame it this way the delta between.
Total system performance in dining rooms would be about 200 to 300 basis points in other words those dining rooms were open you'd see a 200 300 basis point lift.
In system comp sales.
Great and then less last question.
It was really on the you shared on the last call some breakeven estimates for.
Sales declines here at the at the store level have those change now that you've had experience with dying dining rooms being open.
Just to be update us on kind of breakeven cash flow sales levels.
And and basically kind of what I guess, what that would mean for restaurant margins going forward. So I wanted to.
Hi, Jason as Steve alluded to there's there's a tremendous amount of variability. So we did indicate.
While our view on average is as applicable in a highly stressed environment also benefiting from the fee relief program that we provided in Q2. So at this point you do have a range, where depending on where our franchisees are located.
We're experiencing a variety of deferred cash flow situations and we are closely monitoring that I will speak to our company operated portfolio.
Which we have obviously a lot of visibility this is our north and South Carolina Applebee's and so we obviously experienced dramatic improvements for full is performing in line with entire applebee's system.
And there we anticipate from affordable.
Four wall profitability perspective, the EBITDA positive for the year. So hopefully that gives you a little bit of indication just just as a point.
Great. Thank you very much.
Yes, I think the point that Tom made that's important is we are very closely working with our franchisees on their financial health, which obviously has been significant Lee enhanced by the PPP program.
However, we're working very closely with the leadership groups as well as monitoring every single franchisee in terms of where they stand so that we know when people need help in individually, we work with them to help everybody survive.
Thank you.
Your next question comes on the line of Mr. Yen from Wedbush. Your line is open season.
Thanks for taking the questions. It's great to obviously, it's great to see the trends here in July and the came into the topline.
Tom.
To address a couple of the bigger concerns out there relative to the Q2 closure rate and relative to the Q2 gross margins.
Where we headed in the near term.
Can we have safely assume that those gross margin in Q2 were were as beds going to get.
And also just kind of address what your thoughts are around unit closures for each brand.
Yes, so if we have an updated guidance we suspended as you know the but let me give you some context into why some of these.
Normally we wouldn't be able to provide some color on that but the reason why it's a little tough is simply because you have circumstances for example, the incidence of the IHOP franchisees.
Had some closures and then we were able to.
Hi, good amount than transfer to a new franchisee and so we did have some closures that we deem permanent during the quarter.
But the predictability of that is going to be difficult to determine at this point with respect to gross margins a lot of that since fluids, obviously buyer collections experience and as I mentioned the good news there is our collections or.
Very strong coming out of the lease program. So we believe the release program had good intended that the DPP program provided a lot of liquidity in the system and now as Steve mentioned, we are monitoring or individual franchisees very closely.
Thanks.
One other comment.
I've been in this business almost 40 years I've never see the quarter like this quarter I sure hope, we're not going to see anything else like this yes. So it's it's getting better it's got to get better from here. So it's it's a remark period I mean.
I just have never seen anything like a quarter like this and its just.
Good to having behind us and good is be moving forward with some momentum.
Yeah, absolutely fair enough and then just on the marketing.
For for both brands clearly the Applebee's marketing has had some has really work how are you thinking about the rest of the year are we back to pretty much a normalized cadence or they're going to be any.
Gary its short periods are long periods, where you're going to go off again.
His menu innovation going to come back with the value focused are we thinking about all those things, yes, let me, let me, let both folks and address or individual brands, but in general our view is we're going to make sure that our marketing efforts are sufficient to the opportunity and that work.
On air when we need to be.
There are some obviously as we have every year some planned gaps, but there are carefully plan. So that we don't believe that theyre going to cause drops in the momentum and.
The interesting thing for Applebee's had a lot of momentum going into this and so now we want obviously recoup that.
I was doing okay, but we're hoping to pick up from that and they're showing that there are running neck and neck with competition at this point.
Abbvies looks like they're actually run a little ahead of the competition. So obviously, we want to maintain that positioning.
What you will see as we have.
Have significantly increased level of digital.
Because of the fact that a lot of the efforts that were doing are about off premise.
And we want to make sure that we're communicating to our.
General 11 million members between Iops.
Program and Applebee's program about specials that we've got available and reasons to come either pickup or come to the restaurant and died and so you'll see us.
Shifting a little bit more towards the digital side as we've done.
And had some great success and then obviously as we bring additional technology to bear were user on device and Anna.
And a technology menu that allows us than to continue to grow our ability to communicate with customers youre going to see us probably step up those digital efforts and then obviously, we're going to continue to be on air with commercials that we think drive folks either to off premise or to into the restaurant. So Jay will talk a little bit of yes, we.
Just went back on the air on the 22nd this month and I would think for us without disclosing what we're planning on doing I think the calendar have you seen marketing will look more similar to what we would typically do we intentionally turned off.
Our marketing for a long period of time to save that money for them more appropriate time to start marketing. We think that perfect time is now I think the other thing will do is.
We have already pivoted behind the scenes a couple of times as to when we were going to start marketing, what we wanted to market et cetera, and I think that we'll continue to do that the rest of the year. This is a very fluid situation still as you can see within closing down diners in California again, so we don't want to spend the time.
Marketing dollars pushing just a get back into the restaurant message if those restaurants aren't going to be open for dining on have too much of the capacity restriction. So we're going to be watching situation closely we do have the funds and we will be doing marketing what we market. We will we will have it as time goes by too.
Think about what's the value play we want to do what the innovation, we want to talk about what the capacity in restaurants, how do you keep supporting the off premise to go message will will bounce all of that make good decisions through the balance of the year to market the right. Thanks.
Then Nick on the Applebee's front we.
We're pretty good at this we know we know how to market effectively in this environment.
We've demonstrated that our fund is healthy that's really important that was the benefit of taking that 90 day hiatus will continued market. Our objective is to maintain top of mind awareness and will have.
Extraordinary sensitivity to the environments dense everything from how our guests feel about dining out.
Both from a dine in perspective, and an off premise perspective too.
The variability across the country in terms of government restrictions, we can effectively drive demand as to the.
Constraints on that demand, we will actively seek that out and then to your final question there'll be a balance of value orientation, and innovation, probably less innovation to be quite Frank in this environment given our.
Reduced menu, which has had some significant operational benefits and then the final point that I would make is.
The media landscape is going to be different America needs of sports.
And I'm hopeful that some of those currently restricted media.
Vehicles become available as a result, I anticipate that.
The media landscape generally speaking as we go into next year is going to have less demand.
And for the first time in a long time.
In absence of inflation, which is good news and then you have the the election variable, which will be interesting come November.
Thank you very much.
Your next question comes from the line of Mr. Jeffrey Bernstein from Barclays. Your line is open.
Okay.
Great. Thank you very much.
Two questions one it seemed like.
Both brands, you talked about independence and potential for significant store closures, just wondering what you've seen already or what your expectation is in terms of the industry as a whole or whether any particular brand is more or less vulnerable, presumably thats creates a market your opportunity for you.
And it does raise the question because I think many people think of franchisees.
I don't quote independent operators. So I'm, just wondering whether you guys here so vulnerable to more closures and your system at either brand and then I had one follow up.
So let me start.
Well I suppose space so.
So look you're seeing the same numbers that were seeing where people are projecting upwards of 75% or higher of independence closing.
So obviously theres going to be a lot of building is available for conversion and you had several brands that when pre virus were struggle. So.
So obviously and you've seen some of the numbers there third closing a lot of restaurants.
We're obviously looking at this all very carefully there are some restaurants that will probably close.
A lot of those restaurants were marginal before they started so it's this is sort of just hasten the potential.
Potential loss of a couple more units we are not viewing this as a major change to either the systems.
And obviously, we're prepared to step in and assists, where we think it makes sense with individual franchisees were also prepared to look at restaurants long term that probably are on the margin anyway and say, okay. We will do they have long term viability are not announced as good at times any to try to figure out away out of those restaurants provide.
Why did we get replacements for them. So so it's a combination of efforts that we think is mostly upside for us.
And we think it the at before end of this.
Episode, I think what you're going to see is with companies that emerge with strong financial capabilities are going to be in a really good position for growth and that's sort of but the way that we're reviewing it Tom you want to comment that will bring desktop, yes I think.
The one thing independence don't have been to your point online.
To your point on whether or not franchisees are viewed as incentives, we view them as independent operators, obviously, but theyre affiliated with the National brand.
Over resources and I did mentioned, we are bringing that resources.
As appropriate.
We also very strong liquidity position and we are willing to step in we did that in the past we have our own company operating portfolio. Obviously job. So we have a number of levers that we can imply that true independence, probably don't have the disposal.
Yes, I, just say from the IHOP side.
Keep in mind like I said, we opened 13 restaurants. This year at the beginning in the year, we have a strong desire for growth on the line outside and had a lot more restaurants that were planning on opening this year that we allowed deferrals for franchisees. So we think our growth engines going to it going again once as passes but as Steve said.
We have a long history of working with franchisees and trying to find replacement restaurants were finding new owners in some situations because.
The reasons why restaurants.
Close down are very out there's a there's a lot of different reasons why those things happen.
We assess those situations and figure out is this restaurant viable.
With a little different structure with a net new ownership group or not or does it just need to be replaced with any restaurant. So we assess all those things as we're making these decisions I would expect we will have.
More closures how many though is is it just too many variables to even kind of think there what that might look like right now and any time, we get those situations. We're trying our best in same the restaurant there are different franchisee or to do not have a permanent closure thats why we have temporary closures that we talk about because we.
Tend to get those restaurants back in as you enter Tom say, we lost 49 restaurants in a bankruptcy down we're going to get probably 41 of those back here pretty soon and then.
Jeff the this John the reason I'm bullish on Applebee uses the if you look at the categories, you look QSR and fast casual and casual dining.
In particular, the one category that is absolutely disproportionally reliant upon.
Independent restaurants is casual dining 90, plus percent of all restaurants in casual dining or independent which means strong vibrant brands with scale.
Who are well positioned will benefit significantly it would be the one category that stands out in terms of opportunity.
And to clarify I think at the beginning of your comments, Steve you mentioned something about.
You hear a numbers of 75% of independence, where potentially closing I just wanted to make sure that correctly, yes, yes, thats does those are the headlines that we've been seeing I've seen I've seen number 75% to 85%.
I don't know, whether thats right or not I've also seen in the restaurant Association, saying they think the total number for the for the industry could could be a 3rd% to 40% of of losses and most of those being in the independent range. So they do the I think the the discuss.
Turning around scale and.
And brand awareness and the ability to digital work in the technology. We can bring is just out of reach for most independence and that's why you're seeing them bear the brunt others.
And so our expectation is.
There's no question, we'll we'll close restaurants, but we don't think the numbers going to be a big number and when people right articles about the industry being under terminal bill throw things in like that bankruptcy and they say look iops close we're not restaurant, they don't come back and say, but they reopen 41 of which is pretty much. The case as we've seen in a couple of these.
As instances so far so our expectation is we're going to we're going to keep most of our restaurants will have some closures, but then we're going to have a lot of growth opportunity afterwards.
Understood. Thanks for the color.
Yes.
Your next question comes from the line of Brett Levy from.
Then foreign partners.
Okay.
Taking my call Hope you are all doing well I guess, we could just try to circle back on some of the questions that were asked.
We estimate a different ways, if I get a different answer.
What is your.
And your breakeven propositions for units that have dining rooms.
That are off premise only.
What do you think the sales gap is kind of is it possible that the margins.
Given the operational improvements you're making.
Can actually expand beyond where they work hard for the incremental costs that you're at that you're introducing for greater off premise safety.
But those enough to.
Overwhelms any of the recovery.
That's a great as a great question so.
Tom weighted a little bit on the margin so here's the way to think about it.
We've got some incremental costs associated with with with BP, making sure that guesser safety, so things are safe.
But those have been offset and probably benefited from a more tightly.
Group menu.
With a focus on the things that are really moving so one of the benefits of this is in both brands. We have had extensive menus and had been working with franchisees to try to bring that number down obviously, everybody feels there guess like something different so hence the proliferate.
One of products on the menu, but this has allowed us to tighten the menu in conjunction with the franchisees in a way that allows better execution in the kitchen and also provide better cost management as a result, so our view is coming out of this we have the opportunity to maintain that off premise had return.
To comparable dining room levels over a period of time you. Your guess is to the recovery line is as good as mine at this point well I think we'll know a lot more this fall, but the opportunity on the upside is if we gain back those restaurant sales and we maintain the bulk of the off premise.
That puts us in a better positioned from a revenue standpoint than before and with a lower number of different items on the menu higher efficiency in the kitchen, we're probably going to be more profitable now that's notwithstanding sort of food cost spikes that we're seeing loads in fourq or deep or whatever but those will pay.
Reasonably settle out as well so the opportunity going forward for profitability in restaurant.
He is probably better than it was provided we returned everybody back in the diner and so so the combination of those two we feel is potentially an upside in the in the long term so.
Let me, let me give some additional data points year, so respected incremental costs, we did as both brands operations teams to assess the onetime cost of reopening the restaurants to those are the cost therefore to enhance sanitation standards and that average.
It's about $3000 per restaurant, the ongoing costs add up to about approximately $1000 per week and so not insignificant. The are they are incremental to the restaurants now when you look at dining room to the ROE versus that are in off premise mode only and apply this number.
At both brands because it's about the same there's a 30 point sales lift if the dining rooms available to the open. So again, if you look at or averages that we put out there with respect to comps for both brands.
Thats a blend that's a blend of dining rooms are open and dining rooms that are close to the dining rooms open you got 30 percentage point lift.
When we think about even those restaurants are opened let's let's keep in mind, they're not opened 100% so using our north and South Carolina restaurants. As an example, they are subject to six foot distancing were 50% restrictions. That's very typical of dining rooms are open. So there are couple.
Lastly, constrained and that puts a cap on on some of the sales performance even in those restaurants that are open for applebee's in particular, there's restrictions on late night operations are the bar past certain Howard So again, we feel as.
Things improve in the country in some of these incremental it's now the digital function of dining room being open or not we think theres some room for improvement as even those restaurants with dining rooms open have additional.
Restrictions lifted.
So I would just say from IHOP standpoint, if you if you talked to our franchisees. They will tell you. There are puts and takes on this right in some ways hemorrhages menu probably reduces some food cost you get more efficient with what you're managing et cetera, and some franchisees have seen less profit labor because they're not.
As many things that we were done before but that takes the amount of cost for the ongoing sanitizer gloves mass et cetera are probably outweighing that right now. So if you talk to franchisees. They would probably tell you not puts too. Many takes right now I think the key thanks, Steve said there was we have a huge topline opportunity coming.
Yes, because we have talked people how to use us for to go out and to do off premise and as Steve said is we can maintain.
Even half of the increase we've gotten on that and get our diners back with full capacity, our sales are up and that flow through in that leverages going to lead to higher profit. So theres, a big opportunity for us, but if you have to franchisees right now while they're still down 35% in sales they'll tell you it's not working for them right now we got to get the topline back.
Nothing to add and breadth.
And if you think about franchise system just in general.
If you could bucket it like what percentage of the system do you think is healthy universes.
Those that are still extremely are significantly challenged and might need some additional help either handholding are financially and then what kind of bucket of your franchisees are out there. So you know what we are interested in buying more we are interested in building more we want to get back to the growth algorithm.
Yes. So obviously there are variances in the in the health of the franchisees.
I will tell you said it was existed pre virus and so so the virus may have made some situations a little more intense than than before that I will tell you that because all of the franchisees were our bulk vast majority were able to take advantage that PPP program. That's clearly.
Helped.
And then we've got individual franchisees that we're working with.
Who were going to need some.
Some some assistance.
From a short term basis to two to weather the storm and we plan on doing that individually with them as opposed to what we've done.
And with the buyer started on a programmatic basis, and so that which is what we've always done by the way and so so our view is franchisees in general are pretty good position, but it also depends on the recovery and so if you're if you're telling me that we're going again, a relatively rapid bounced.
Back this fall and into the the end of next year, and then and to the end of this year in the next year looks pretty normal.
And were pretty good shape, if the if it's an extended period of recovery then individual franchisees by franchisees or some of them, we're going to need some assistance and some of them. We'll end up figuring out what's best long term solution is for those for those restaurants. So.
It is a it but it is a kind of week by week.
Scenario of look if you look at our restaurants. We are we are cash flowing in north and South Carolina, we're not making a lot of money, but we're passionate and so.
Thats not where we've got a lot of franchisees in that position. We also got some franchisees that are in tougher markets that are not do as well in California is a great example.
With dining rooms close.
Nobody is going make any money. So so question is how long is that last in do they have the sufficient funds to to withstand that period of time before they reopen in and recover and then we're going to and then we're going to assist.
Individually with franchisees to help them either figure out long term positioning of their assets or.
To maintain to sustain into a recovery period.
Thank you very much.
First question comes from the line of Mr. Ricardo from Raymond James Your line is open.
Hi, yes, thanks for taking my questions. So back to the last when you were just talking about on franchisee health and in the past I guess, a few years ago, but you did a nice job disposing sort of how many franchisees youre working with no the nine industry.
That obviously healed from there, but what would you be willing to maybe just frame a little bit more how many franchisees are what percent of units at each brand. Our operated by franchisees that are on your radar of of receiving additional relief for help.
Yes, well end the reason we're not doing that is very different situation. So the answer is there's a handful that we may or may not begin talking lift, but it's not it's not it's nothing like the previous downturn.
For the Applebee's franchisees there are obviously everybody's heard and everybody is looking for profitability.
And so, but but we don't have a theres not theres not a one of the reasons, we're doing a dramatically stepped up cooperative effort with the franchisees is to take a deep look into the sustainability longer term. If this thing for up to this thing runs at this levels through the end of the.
A year in next year starts out slow that changes the picture directly but we're not there's not there's no major program underway at this point.
In bright annuity.
I guess the other point that I'd make is an obvious one but the one thing that we're working hard to do is return each business. The full revenue as quickly as possible considering market conditions. So Q3 is important Q3 is going to give us some visibility to that rate of return towards towards positive sales.
Yes, I think the two you've heard about were problems pre virus. They had nothing to do with buyers and those both turned out pretty well for us.
Yes, yes, understood, Okay, and I guess just to be clear on the status of franchisee release more recently as the business has recovered.
Our essentially all franchisees now paying royalties and advertising season in the case of IOP rental payments.
And if not what percent of each brand are still receiving some level of deferrals.
Hey, Brian So for all intents and purposes, we're back to kind of a normative rate of collections on both brands and with respect to IOP actually there were many of our franchisees that you sold the numbers there were struggling.
Having said that one of the conditions of PBT was that the money was used to pay.
Not only employees, but also rent and so we have the with the good good good repayment on the rents as well after the deferral period.
Okay, Alright, and then I wanted to ask on Applebee's side effects and the operational changes that were made timna streamlining the menu could you help frame what percent of the items, you've removed and how do you plan to manage adding back items.
To the menu and where could that land ultimately compared to the historical menu.
Hey, Brian that's a good questions John the.
Proliferation of a menu in any mature brand is something that has taken place over a couple of decades. So.
We've taken about a third.
Directionally of our menu items off the menu. It will stay off that we have focused on items that are in high demand high velocity low complexity.
And we've removed lead the third that we've removed represent probably 10% of.
Dollar volume, but we easily move guests to like items. Our franchisees are very enthusiastic about that and in terms of adding items back I don't anticipate additional proliferation will be smart strategic if we decide to add items, we're going to take other items off and so that discipline.
Has been in place for a while here the pandemic has accelerated our movement to a simplified operation which has.
As guests benefits and financial benefits.
Yes. This is Jay on the on the IHOP side, we did very similar thing we cut the menu by us by a percentage and.
We intend to leave most of that off as well, we think there'll be some items that may come back and more importantly, we leave ourselves a little bit of space for some new innovation as time goes by.
But it's not going to get back to the level that it was.
Okay, and then also on the operational side could you provide more color on the measures that franchisees have taken to expand capacity during co bid whether it be expanded outdoor seating or adding plastic barriers in the restaurants to optimize bid seating just kind of frame or quantify how important those factors.
Then.
Hey, Brian.
John Here, we have 30 partners.
At Applebee's their naturally entrepreneurial they've been successful and.
What we see both in and out of course. This assumes they are permitted to have outdoor dining which has its own complexity.
But significant creativity around to that.
And then me.
Whether it's a barrier or.
Anything that can be introduced inside of a restaurant that.
That allows additional capacity there's been a lot of creativity there around.
Plexiglass items that can separate adjacent moves and eliminate the need for six foot distancing those tend to be branded they tend to be high quality as Tom referenced cost some of that his initial kind of out of pocket onetime costs that won't be recurring but allows these guys.
As to maximize their capacity in the face of constraints all good I mean, there's a whole lot of creativity, taking place right now.
Daily basis.
Outside what we're doing very similar things and this is word spreads being a franchise system because franchisees are much more entrepreneurial that is where they are similar to independence and when when their survival is at stake they find creative ways to solve problems and they've done some very interesting things than what we do is when we get the things.
They have done locally often times multiple share those as best practices out to system back we do regular town Hall calls with our franchisees, we actually had our architect on the call with them on one of our recent calls to walk them through how to execute Dennis If you are local municipalities will allow us in one of the steps to do it what how to.
Make it look one of the specs to do that so.
Yes, that's been very very successful where they've done.
All right. Thank you I'll pass it along.
Thanks, Brian. Thank you so just.
For the question about sort of the overall industry.
Theres a national restaurant Association.
Statement out that says restaurants have lost more revenues and jobs than any other industry and they estimate that in June for the first three months. The pandemic. It was $120 billion loss revenue, which is why we're working with the National restaurant Associates and international franchise that decision National retail Federation for more system.
For the industry in our franchisees and then according to the restaurant coalition the independent restaurant coalition.
They were the ones that put out the number that 85% of independent restaurants may go out of business by the end of 2020, so sobering numbers.
However.
Yeah.
One versus prices is another person's opportunity in our view is we're going to emerge from this thing.
With a lot of strength and capital and Thats going to put us in a position to resume a significant growth.
Trajectory for the company.
And we are.
Excited about seeing that month month momentum build and we get a recovery in full opening of all restaurants, and then take the lessons learned and have higher revenues and higher profitability as a result.
It looks like a long road to that at this point, but there is a road and us at a at a vision to get there over time so.
So with that I just want to close say, thank you for time, I hope, everyone staying safe and healthy.
Visit our restaurants, we do a good job of creating a safe healthy environment with great food. So thank you again for your time and we'll look forward to speaking when next quarter.
This concludes today's conference call. Thank everyone for joining will now discuss Mike Hennigan.
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And.
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